Many investors believe an RSP is an investment, like a stock or a GIC with it’s own rate of return. This isn’t the case. An RSP is a container, with specific rules for adding and removing funds. The return within the account isn’t a factor of it being an RSP, but what is inside of it.
Asking “what is the return on an RSP?” is like asking “how fast is a red car?”. The colour of the car is inconsequential, it is what is under the hood that matters.
Investing inside an RRSP
The Government of Canada provides us with a long list of qualified investments that can be held in an RSP, each with their own expected rate of return. To spare you the arduous task of reading through a Government of Canada Income Tax Folio, I will summarize the most common investments we see:
- Cash
There is no rule stating that funds inside an RSP need to be invested. If you leave the funds in cash, the rate of return is easy: 0%
- High Interest Savings
Hate risk? Think you might want access to the funds at anytime? You can invest in a high interest savings account within the RSP. This won’t pay a very high rate of interest as returns go hand in hand with risk but you are assured that the funds won’t drop either. At the time of writing, high interest savings is paying between 2.5 and 4.3% per year.
- Guaranteed Investment Certificates (GICs)
You can buy a GIC within the RSP. A GIC pays a fixed rate of interest in exchange for a fixed term. During the term you cannot access the funds. A 1 year GIC is a promise: “I promise to give you my money for one year if in exchange, you promise to give me a fixed rate of interest”. Typically the longer the term, the higher the interest rate but at this time a 1 year GIC is paying 4.85% where a 5 year is paying 4.2% per year. Strange times.
- Stocks
You can purchase individual stocks within your RSP or even transfer stocks you already hold into the account. Note that if you a transfer a stock which currently has a gain into the RSP you’ll need to pay tax on the gain as if you sold it. You can’t shelter the gains that have already happened!
The returns of any individual stock are impossible to predict as the outcome will be dominated by unexpected events. The returns could be fantastic, or the stock could drop in which case you lose both your cash AND your RSP room.
- Mutual Funds
Most Canadian mutual funds can be purchased within the RSP. You could buy a conservative fund, in which case the returns would be lower but so would the risk. Alternatively, you could buy a niche-ultra-risky mutual fund. This will lead to impossible to predict returns, just like an individual stock.
- Exchange Traded Funds (ETFs)
ETFs and mutual funds are similar, they are investment products made up of individual stocks and bonds designed to track a benchmark or to be managed by a portfolio manager. ETFs are traded through a brokerage account and typically have lower ongoing management costs than an equivalent mutual fund. Lower fees for the same investment = higher net returns to you. The most important factor will be the risk level of the ETF. Just like with mutual funds, you can buy conservative ETFs or risky ones. There is no way around the risk/return relationship.
- Mortgages (uncommon, but interesting)
If you have a large RSP you can lend yourself funds from the account to buy a home and pay yourself interest rather than the bank. This is beyond the scope of this paper but is not very common, comes with extra administrative costs and is likely not a good fit for an investor who would be comfortable holding some portion of their portfolio in stocks which have a higher expected return over time.
The Take Away
There is no one answer to “what is the rate of return on an RSP”? Your rate of return as an RSP investor will be determined by the investments you hold inside the account. If you are a conservative investor, these returns will be lower but more consistent. If invest more aggressively, your rate of return will be more scattered year to year but expected to be higher on average over time.
